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torsdag 24 november 2016

Canacol

TD on CNE - Nov 23

Accelerated Gas Deliveries, Further Infrastructure Announced

Today before market open, Canacol released details regarding a private pipeline, new gas sales contracts, and updated production forecasts that will see the company accelerating the ramp up of its gas deliveries.

Impact: POSITIVE

■ Target gas deliveries of 130mmcf/d by year-end 2017 and 230mmcf/d by year- end 2018 are a positive upwards revision to the prior guidance, which had the company see a step change to ~190mmcf/d in 2018.

■ The company disclosed that an Special Purpose Vehicle (SPV) has been formed in order to develop a private pipeline designed to take 40mmcf/d of Canacol's gas from Jobo to the Promigas line at Sincelejo. Canacol ancitipates a $50 million capital raise (outside Canacol) through a combination of debt and equity.

■ The company highlighted that 100mmcf/d of new take-or-pay contracts have been secured for delivery starting December 2018, resulting in average contract pricing of $5/mcf for the 230mmcf/d of deliveries.

■ We are encouraged to see that the company is taking steps to uncap its ability to

crystallize the value generated through its successful gas drilling campaign, putting its added productive capacity and reserve additions to more immediate use. We await further details regarding plans to take the company's Jobo processing facility capacity from 190mmcf/d today to 230mmcf/d for its deliveries in 2018, although we do not anticipate that it will be a significant outlay (if any) relative to our estimate of the company's cash flow profile by then.

■ We maintain our BUY rating, but have increased our target price to C$6.00 from C$5.50 as a result of our increased NAVPS estimates, and reiterate Canacol as one of our top three BUY recommendations.

TD Investment Conclusion

We are attracted to Canacol for its long-life reserves and its plan to double gas sales volumes in the next few years. Canacol has visibility to substantial cash flow growth from the ramp-up in gas production, which is supported by strong regional market demand. We also highlight that the company retains light oil upside that could be exploited in a sustained oil price recovery environment.
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Colombia-focused Canacol Energy Ltd. (CNE) added 30 cents to $4.72 on 1.54 million shares, after setting new and even loftier ambitions for its gas production, while lifting the veil of secrecy off some of its previously announced gas sales contracts. The company had announced on Nov. 10 that it had signed contracts in support of its plan to boost its 90-million-cubic-foot-a-day gas production to 190 million cubic feet a day by the end of 2018. It did not discuss the length or pricing of those contracts at the time, but now it has provided those details: There are four take-or-pay contracts in total, each lasting five to 10 years, with "large, established off-takers" that will pay an average price of $5 (U.S.) per thousand cubic feet. These were more or less the expected terms, but it is good to have them confirmed. More interestingly, Canacol has shifted its 2018 target up to 230 million cubic feet a day from 190 million. It says it has formed a special-purpose vehicle (SPV) to build a private gas pipeline that will carry the additional 40 million cubic feet a day. The first shipment on this private pipeline is expected in December of next year, which means that the next big increase in production is closer than previously thought. If all goes to Canacol's plan, gas production will be 130 million cubic feet a day at year-end 2017 and 230 million by year-end 2018, towering above today's level of 90 million.

This plan has many moving parts, of course, not all of which are under Canacol's control. For example, key pipeline builder Promigas is expected to finish a 100-million-cubic-foot-a-day pipeline expansion by December, 2018, after a construction period of just six months -- an optimistic expectation even if those six months did not include the October-November rainy season. As well, with today's announcement, even more pipeline construction is in the mix, requiring the SPV to raise $50-million (U.S.) before it can even get started. Speaking of money, Canacol will need plenty for the exploration, appraisal and development wells necessary to meet its newly raised commitments. This in turn puts increased pressure on its efforts to refinance its $225-million (U.S.) debt so that it can use its money for extra drilling rather than principal repayments. Otherwise, the debt will start to mature at the end of next year and will require $90-million (U.S.) in repayments in 2018. Negotiations on a refinancing are still in progress.